Money Matters caught up with Stuart Johnstone, an Independent Financial Adviser at Wren Sterling to discuss his personal experiences of working through peaks and troughs in the market and helping clients stay on track.
Then we spent time with Graeme Wake, an adviser based in the North East of England to see how Charles Stanley, a wealth management firm that forms part of Wren Sterling’s investment panel, reacted to changes in the market.
At the end of 2018 the US S&P index had its worst month since the great depression, yet in January the market bounced back with its biggest one-month performance since October 2015. In a microcosm, this is the life of an investor. The period in December prompted concern from investors, but if they had panicked and sold they would not have benefited from January’s boom.
MM: Thinking back to previous market wobbles, like 2008 and 1999, how did the end of 2018 period compare?
SJ: I think these moments were very different and I’m not sure they can be compared. In the 2008 recession, I was receiving phone calls from nervous clients and people who just wanted guidance because the market was falling daily and seemed to just keep going.
That was a time when visibility and contact with all clients, whether through calls, emails or meeting face to face, proved imperative to maintain their belief in their strategy. By explaining what was happening and discussing the impact the markets were having on their investments – good or bad – I ensured no impulsive decisions were made.
I had a client whose portfolio value decreased in the region of 35 per cent during the worst time of 2008. By discussing options and realising that the strategy hadn’t become bad overnight but the whole market had moved, the clients took the decision to keep the investment as it was and the bounce would hopefully be greater. They weathered through the worst of it and as we had discussed and hoped for, when the bounce came their fund grew by 90 per cent the following year.
For me, that period validated the way I had recommended investments. I always made sure my clients understood peaks and troughs and that in the investment world we should look at them as an opportunity. During the last quarter of 2018 no clients were nervous enough to make contact over the fall in the markets, so not at all like 2008.
Time in the market is better than timing the market
MM: When you were starting out as an adviser, what was the best piece of advice you received about generating returns from the markets?
SJ: When I started 19 years ago I was always told ‘Time in the market is better than timing the market’. This is because while market timing (continually trying to buy low and sell high) may make sense in theory, few manage to do it in practice. In fact, study after study has proven that trying to time the market tends to be detrimental to one’s financial health.
Those who try to time things so that they’re at their peak when you sell, and at the bottom when you buy, generally don’t succeed. Additional trading costs can also eat into the value of a portfolio.
It can be tempting to look at cash when the markets are volatile, but in the context of long-term returns, historically that has not paid off. Looking back at the worst market conditions in recent memory, we’ve turned to an old favourite to illustrate this…
A 7IM Balanced holding worth £100k on 19th May 2008, the day the FTSE began its descent that year, is now worth around £156k. However, with a year spent in cash from 1st March 2009, the market low, it would be worth only £126k today. That’s a 56% vs 26% return. (Switch 1) Those dates were the worst you could’ve picked but if you’d have been a bit luckier and timed your exit earlier to avoid more downside, i.e. cashing out on 1st October 2008 for one year, you’d experience a 43% return vs 56% had you stayed invested. (Switch 2)
Only if you’d timed it perfectly (moving into cash at the top and back in at the bottom) would this work. The brightest minds in our industry didn’t call that because ultimately they cannot predict every market movement.
MM: And we certainly saw that strategy pay off earlier this year didn’t we?
SJ: Keeping clients focused on long-term investing and helping them avoid knee jerk reactions to market dips is rarely rewarded with immediate gratification, but after the worst December since the great depression (-9.6%) the S&P 500 recorded its biggest one-month performance since October 2015 (7.89%). This was the best January in the US since 1987.
MM: During periods of uncertainty, does financial planning become more or less important?
SJ: Definitely more! It can be hard to remove emotion when you’re dealing with money, but that’s what an independent adviser is able to do on behalf of their clients. We help our clients to stay focused on the long term and ignore short-term market downturns and negative headlines. Advisers tailor an appropriate long-term investment plan to meet specific needs and adjust it over time as the market moves and clients’ needs change.
In 2008, it was common for people to invest in self-select type funds and ignore multi-asset funds, and were invested in an individual funds at a risk level that they felt comfortable with. However due to the volatility of the markets, when one reviewed the portfolio as a whole, their portfolio was actually much higher in risk. It wasn’t uncommon to find a middle range fund, say 5/10, move to a 9/10 based on volatility and content of the fund.
That’s when clients really benefited from the support of an adviser, because we could help them manage their risk, and reduce where appropriate, or if they are able to accept that level of risk after explaining the likely impact of doing so.
But of course, different people have different requirements. My concern now and for the future is that with pension freedoms and a greater number of individuals entering Pension Drawdown, that some are going to be eroding their funds away quickly if they don’t manage their risk and their growth expectations during uncertain times.
With annuities seemingly falling out of fashion, people can be overly-reliant on their investments providing them with an income in retirement without any plans for what might happen if these funds are tested by falling markets. The impact could be the money is eroded away far quicker than they expected.
This is where the value of cash-flow planning tools really comes through. We use them widely at Wren Sterling to visually demonstrate how peaks and troughs (which will always occur) can impact funds and ultimately the clients’ lifestyle.
MM: Graeme, which events have been shaping the uncertainty in financial markets?
Graeme Wake: According to Charles Stanley, the bull market that started following the financial crisis is long in the tooth, disputes over deficits sparked by the current US administration are hitting trade and there is significant political uncertainty in Brexit and the rise of populism in general. European parliamentary elections later this year could also result in the appointment of more-populist Commissioners, straining internal relationships in the bloc.
As we know, global stock markets fell sharply at the end of 2018, hit by concerns that central banks, particularly the Federal Reserve, would raise interest rates too aggressively this year. However, a change in tone from the US central bank has helped stock markets rally in 2019. One of the biggest concerns in markets is still Donald Trump’s trade disputes, which has hit global supply chains and business sentiment. Hopes have been building that an agreement can be reached with China soon, with high-level meetings between the two nations’ trade representatives ongoing. Then there’s the Eurozone.
The health of the single-currency area has also been a worry, as data from major economies such as Germany has indicated a substantial slowdown and it is possible that President Trump will turn his trade guns on Europe once a deal is struck with China. Germany is particularly vulnerable as it is a major exporter to China, as President Trump is keen to target automobile imports in an attempt to boost manufacturing activity at home.
MM: What has that meant for Charles Stanley?
GW: Following a good run in the markets in the first quarter of 2019, the Charles Stanley Investment Strategy Committee decided to reduce its relatively high exposure to shares. Share prices have risen to reflect the relaxation of monetary policy in the USA and China, and in anticipation of a US/China trade deal. Whilst the background remains one of modest economic growth worldwide, company earnings are likely to show only slow growth at best in 2019 and markets seem well up with events. There are individual sectors and companies subject to adverse pressures on cashflow and vulnerable to poor newsflow such as the global car industry highlighted earlier where difficulties remain, and there could be further trade rows between the US and the EU. Even the successful technology and communications sectors will face headwinds from more regulation and pressures to pay more tax.
Against this background, Charles Stanley reduced overall growth assets in their model portfolios by selling part of the equity holdings.
The biggest threats to the outlook of benign but modest progress comes from the danger that Central Banks will still tighten too much, stifling credit for recovery. The US Federal Reserve Board is presently reviewing its way of setting interest rates and is more likely to decide to loosen a little more. The European Central Bank ended its Quantitative Easing programme just in time for the slowdown, and has problems supporting the commercial banks to enable them to finance a more vigorous recovery. The long-term prospects for equities remain positive, but at a time like this, it is vital that an investment portfolio is continually monitored as markets can move rapidly in either direction.
In times of market uncertainty managed portfolio services can show their value.
MM: What exactly is a managed portfolio service?
GW: Managed portfolio services (MPS) are widely available and are simply portfolios of funds aligned to specific risk profiles and investment strategies.
The portfolio managers handle day-to-day operations (such as broad diversification, appropriate asset allocation, investment fund selection, performance monitoring and more) so each portfolio can be adjusted quickly and effectively as market conditions change.
Financial markets are extremely complex and ever changing. Being on top of what’s going on is now more important than ever, particularly as volatility could be on the increase. This means that active asset allocation in an investment portfolio could be very significant against advantage.
Working with a discretionary portfolio manager, whose sole job is ensuring a portfolio is managed efficiently and effectively and action is taken in a timely manner, should therefore result in more efficient portfolio management.
MM: How does it fit in with Wren Sterling’s role as financial advisers?
GW: As a financial adviser, I am looking after all aspects of my clients’ financial needs – from retirement planning, to tax efficiency to ensuring their children are properly looked after, whether at university or through an inheritance. This means that the performance of specific investments is only a small part my job. I have run bespoke investment portfolios for my clients but the responsibilities of constructing and maintaining such portfolios are very time consuming. As a result, I looked at how I might delegate portfolio investment decisions to a dedicated manager for those of my clients who might benefit – enter, MPS.
Working with a discretionary managed portfolio service provides a powerful combination for my clients as they get two layers of service, expertise and ongoing attention to their portfolio: one from me and one from the discretionary portfolio manager. I know what my clients want from their investments and how MPS fits into their financial plan at the level of risk they are comfortable with.
The distinction between long-term financial planning and the day-to-day portfolio management frees up my time to do what I do best – focus on bespoke planning to maximise my clients’ wealth. The benefits to any client are clear.
MPS is one of several core solutions within Wren Sterling’s investment proposition.
MM: How often do you get calls from clients following a fall in the markets?
GW: Having worked in the financial and investment world for the past 35 years I have experienced and worked through some of the harshest and most unpredictable market conditions in the modern era and during this time I have been fortunate to observe how the most successful investors operated and I have summarised their behaviours into three golden rules.
First, investment is a long-term pursuit so put all short-term market movements in this context. While the FTSE-100 is currently down by around 6% or so from its high point, and it may seem a lot, it means little in the context of a ten year or even longer investment horizon.
Second, try to avoid the ‘noise’ of market headlines and forecasts that lure you into taking an action. I would find something more interesting to follow. Personally, I follow the trials and tribulations of Newcastle United, so I know all about lows but not so much about highs.
Third, investors tend to make too many decisions rather than too few. So, if in doubt do nothing. My clients are inclined to remember these golden rules, so my telephone tends not to ring the day after a market fall.
Please note: The value of an investment can go down as well as up. Past performance is not a guide to future performance. Equity investments do not afford the same capital security as deposit accounts.